FxWirePro: How to trade Yen after BoJ policy?

The Bank of Japan (BoJ) launched very ambitious policy tweaks today while keeping the interest rates and purchase target at the same level. For the first time, in its history and among the history of its peers, the BoJ has launched QQE with yield curve control. Central banks usually aim to control short-term interest rates; BoJ has introduced the guidelines to control long-term rates as well. It would be purchasing the 10-year bonds at fixed rate and would also supply bonds up to 10-year at fixed rate.

Judging from the initial reaction of the market, the policy has been taken as a dovish one. However, judging from the move in the yen, the market doesn’t seem to be too convinced on the dovish attire. Immediately after the announcement, the yen made a high around 101 per dollar as the BoJ refrained from lowering rates or increasing asset purchases. However, it then weakened to trade as low as 102.8 per dollar and currently trading at 102 area.

This new tool, yield curve control is a bit complex one and the real implication is very difficult to gauge. It is far from clear, whether the pace of purchase would change or not, or if this new tool would create imbalances in the JGB market. The central banks usually have very little control over the long-term rates, so it is doubtful whether the BoJ would be able to pull it off or not.

Trade idea:

As the uncertainties remain, we expect the yen to maintain its hawkish tone, only to be influenced by the dollar’s strength. The resistance zone of 103.4-104 (USD/JPY) would prove to be strong one and we expect the yen to strengthen towards 98 in the short run.

In the longer run, any weakness in the yen, likely to be capped below 107 and definitely below 111.